Optimal Decisions with Supply Disruption and Demand Forecast Updating

Abstract

In this study, we analyze the optimal ordering decisions for a retailer, who can order from three suppliers at two stages. At Stage 1, the retailer can place orders from an unreliable but cheap supplier and a perfectly reliable but expensive supplier. The unreliable supplier is subject to a random disruption during production time, and will only supply the quantity produced before the disruption if interrupted. At Stage 2, the retailer can purchase products from a backup supplier when the disruption occurs or the updated demand forecast is high. The optimal ordering decisions from these three suppliers are derived. It is found that the retailer may not place an order from the reliable supplier at Stage 1. However, it is always beneficial for the retailer to order from the unreliable supplier due to its economic advantage. Numerical experiments indicate that the unreliable supplier can be more preferred when the demand forecast is more variant.